Episode 30: If you made a payment today, thank a rule!

Transcript of the recording

Elizabeth (Liz) Dempsey:
If you made a payment today, thank a rule. Hi, everyone. Welcome to The PayPod. I'm Liz Dempsey, Lead of Event Communications and Content at Payments Canada, and I'll be your host for today. Payments are becoming increasingly easier, smarter and safer for Canadian businesses and consumers. There are multiple enablers for this change: technology, innovation, consumer demand, but the real reason payments keep getting better and better is because of the rules and by-laws that support them. But how does a payment rule get created? Once it's created, who governs it and who enforces it? Can a rule be changed? How many payment rules are there? On this episode of The PayPod, find out everything you ever wanted to know and more about payment rules in North America. With me today to tackle this topic are Debbie Bar, the Senior Director of ACH Networks Rules Process and Communications at NACHA, and Charlie Clark, the Manager of the Rules Office at Payments Canada. Welcome, Debbie Bar and Charlie.

Liz Dempsey:
All right, let's get right into the questions. So I can easily say that I think about payments a lot. But I can't say that I really ever give payment rules much thought. Why is that? Are the rules around payments in North America just so good that nobody knows they exist? Debbie, let's start with you.

Debbie Bar:
Thanks, Liz. Well, with anything, if it works well, you don't think about how it works or why it works, you just accept that it gets the job done. But when there's a problem, you might get into the how and why. And if it's payment related, you might start looking into the rules and the participants and what they need to follow in that payment system. And you know, without rules, we would have chaos. So in a payment system, without rules, you wouldn't have interoperability, you wouldn't have that assuredness of what the other parties are doing, you wouldn't have the speed, the efficiencies, all those things that we enjoy today in our payment systems. The rules play a critical role in allowing — in the US in our ACH Networks, we processed over 31 billion payments last year that were valued at over $80 trillion — and it enabled tens of millions of workers to get paid at the opening of business on pay day without knowing how the system works or the rules behind it. So that's what's happening in the US. What about your Charlie?

Charlie Clarke:
Debbie is right. The reason why it works is because there's a tremendous amount of rigor that goes into shaping rules and standards in Canada. They're critical to the frictionless operation of any system. So it's imperative that they be safe and sound, to borrow language from our mandate. Imagine what it'd be like if you went to the bank and asked for a service, and they told you to bring three things. The next time you go to the bank and ask for the same service, they tell you to bring three different things. How much trust would you have in that system? The consistency that rules bring to payments helps to bolster trust in the payment ecosystem.

Liz Dempsey:
Great. Thank you for that. So the rules exist, and they're really effective. Let's get into how payment rules are developed, both here in Canada and in the US. Where do you even start? What are the things you take into consideration? And who do each of you collaborate with? Charlie, we'll start with the Canadian perspective, this time.

Charlie Clarke:
Where do we start? We start with the issue depending on what it is we're trying to address, but I want to actually talk about who we collaborate with. And that is actually very, very important in the rigor that I was talking about earlier. Internally at Payments Canada, the rules team collaborates closely with many of the different departments internally, from our colleagues in the payment operation side, both high value and retail system, those who they are the custodians of the payment systems, obviously, to the legal team and compliance and policy and financial market risks, etc. Even the technology side again, depending on the issue that's being addressed. Externally, we collaborate very, very closely with industry groups. We have a number of industry groups, but I want to mention four main ones and they are on the ACSS side, that's our automated clearing settlement system side, the retail payments side. We collaborate with the electronic payments working group, which is comprised of experts that are knowledgeable in the electronic payments sphere. That is our automated funds transfer or AFT and debit that is kind of like your ACH, as well as the electronic data interchange (EDI) and other electronic related rules. So we leverage their expertise when it comes to rules related to that, to electronic payments. On the paper side, we work very, very closely with an image and paper working group. These are experts that are well versed in paper exchange in any form, whether it's image or paper, or even a replacement document. And then finally, on the high value side or the RTGS, we work with the Lynx working group. Again, these are experts that are well versed in all things high value and support the Lynx side. So these teams support Payments Canada in a very tactical way, to ensure that our rules are operational, they suggest changes to rules, they review any documents or any amendments that we provide them. And they also support the day to day operations of those systems. And they do a lot more, but I was just speaking in terms of their support of our rules process. Those were the three; I have one more, but before I get into that, I wanted to just give a shout out to some of the advisory groups that we work with, like the cash manager group, the legal and policy group, and the financial market risk group to name a few. We also even work with the stakeholder advisory group from time to time, depending on the complexity of the issue, or even just the subject that we're working on, we typically engage these groups for their specialized expertise depending on the issues being explored. Finally, the fourth group that we do work with is the senior operational committee. This group oversees the daily operations of the systems, and therefore is responsible for endorsing any changes we make to our rules for those systems prior to seeking board approval. And between getting their endorsement and the board approval, we do need to share our rules with the Bank of Canada for their 30 day review. Because our systems are designated under the Payments Clearing and Settlement Act, the Bank of Canada needs to provide their support of our rules prior to board approval. And then following the board approval, the Minister of Finance also has power to disallow any rule it sees fit. So there is another period where we wait for the Minister to provide its non-disallowance in terms of how changes are made, and what we need to take into consideration. We have a mandate to operate the systems and make sure that we're taking into account the safety and soundness of these systems. So that's the high level principle that we filter our changes through. In addition, we have a public policy objective to take into consideration the uses of our systems that the customers — you and me for example, so in our development of rules, we have a duty to make sure that we're not only doing what's right for the systems, but also what's right for users. That's the consumers and the corporates and you and me.

Debbie Bar:
Great, thanks, Charlie. So in the United States we have, so for NACHA, we oversee the ACH Networks, so we don't oversee rules related to checks, or wire or the cards. So it's a little bit different, because I'm just going to focus on what's happening in the ACH Networks. But we have a very well defined process for rulemaking. We have a rules and operations committee that oversees the whole process. And they are a committee that reports to our board of directors. And it's a great mix of representatives from various sizes of banks and credit unions, because remember, in the United States, we have about nine to ten thousand financial institutions, and they vary in size from tiny little credit unions all the way up to big multinationals. So trying to make rules that can apply equally across them can be a challenge, but it's a good challenge. So we have representatives from all the various sizes on our committee. We also have staff from our regional payment associations that can help really represent those regional and community banks and credit unions. We have representatives from the end user community, and also from our operators, the ACH operators that act as the switch and our network and our Federal Reserve board of governors has a seat on that committee as well. As you know, the largest user of the ACH Networks is the federal government, and so their fiscal service branch has a representative there too. So I think it really helps us get a good feel for, throughout the industry, how a rule is going to impact the different participants. So when changes come in, our committee is going to look at those suggestions, and they're going to decide if it seems like it's something that could be appropriate for the network, and that would follow along with NACHA strategic plan for the ACH Networks. And so they'll work on developing a proposal and as they're developing the proposal, as I mentioned, we work very closely with our operators, we also have another group called our software information exchange, and this is a group of software providers and processors, and getting their input, because you know, you have to have that community. We have to understand the impacts to them, and how changes could impact them. And once we have that proposal to the point where we're ready to put those proposals out, they go out in a request for comment. And the entire industry, we encourage everyone who's touched by ACH to provide comment. I wish I could say everyone does respond, we try. But we do try and get as much input as we can, and we do look at all those responses. And the committee will review those responses and make changes based on that. We've even had times where a proposal has gone out that the industry just wasn't supportive of and we've tabled, which is fine. But till we make those changes, we get the proposal to where we think it is to the best interest for the network and the users. And that is put out for voting to our voting membership, and that's who would actually approve those proposed changes. So that's really how it goes from, you know, from idea to approval in the US.

Liz Dempsey:
That's all really fascinating and so comprehensive. Thank you both. But it's not just enough to create a rule, it has to be implemented and of course, followed. So what's the process and the governance around this? Debbie we’ll go to you first.

Debbie Bar:
Okay, thanks. Well, as I mentioned, we do gather input from the industry, from our operators from the software information exchange. And a lot of what we're looking for there is the implementation efforts needed and also the timeline. Because as part of our approval process of a rule, we do set an effective date, where we would expect participants to be compliant by that date. And so working with those, those different groups, we can get a good idea or a feel for how long that implementation might take. So we said that's part of the approval, and so now, we have a new rule, we have an effective date, but unless the industry is aware of that new rule, it's not going to be implemented, we're not going to have compliance. So that's where communication and education is such a critical part of the rulemaking process. So besides education though, we have conferences and webinars, and all kinds of other educational opportunities. And we work really closely with the operators who are also out doing a lot of education with their customers, and with our payments associations, and working with their members getting out the word about the new rules. We also have a really good relationship with a lot of our trade associations here, the banking associations and also the end user community, some of the corporate treasurers and those kinds of areas really getting out to their members, and letting them understand the new rules, the impacts to them, what it's going to take to implement timeframes, trying to get that education out throughout. And so as far as following the rules, the majority of our rules are focused solely on the financial institutions and their compliance. So as part of that there is a requirement for an audit of ACH compliance to be performed annually. We also in the US have a national system of fines, that allows financial institutions to file a report of possible rules violation, if they're working with another financial institution that they think is not compliant. In general, NACHA is not going to be out there actively looking for FIS financial institutions that are not compliant with the rules. But you know, if we do have reports of things, then we do the follow up that would be needed to go along with that. How about you, Charlie?

Charlie Clarke:
We have quite a similar system as well, and we do also discuss with the industry, their needs related to the implementation of rules, new rules or rule amendments, in terms of timelines and what their operational considerations are as well. So we do that at the same time as we discuss the changes with them, primarily. By default, effective date or effectiveness for rules is 60 days following board approval that allows at least 30 to 60 days for the ministerial or minister of finances non-disallowance that I spoke of earlier, but sometimes, you know, we might want to have the rules come in effect earlier or maybe even later. And so we would actually provide that date in the proposal for board approval, so that everybody's aware. And of course, that would mean that the members would have to do whatever they need to do to get ready for that. In terms of our communication as well, we do have our rules update page in the rule center on our website, we also do communicate changes to our rules in our Member Exchange newsletter that is issued, I believe, on a monthly basis. Obviously, our rules need to go to the board, so those are quarterly meetings. In terms of compliance, the compliance to our rules, as Debbie mentioned, we're not running after people to be compliant. Rules are created in a way to make sure that everybody can be compliant in those rules. However, if members are found non-compliant, we receive feedback from a member or from somewhere else, and we would then take the necessary precaution. But we do take a risk-based approach on compliance at Payments Canada.

Liz Dempsey:
So we've talked a lot about what Canada does and what the US does. But let's bring both countries together, or even take it a step further and go global. Do you contemplate other countries when creating rules, meaning what's the interoperability of payment rules? Does that apply to all rules or only certain ones? And how do you take all of that into consideration? And, Charlie, let's start with you.

Charlie Clarke:
That's a really great question. Obviously, because our payment systems are domestic, it is very important for us to pay close attention to what's happening at home, so how payments are going to be exchanged, cleared and settled at home between financial institutions domestically. But that doesn't mean that we don't think about what's happening globally. That's not out of our mind, it is very important, actually, it is very much in the back of our mind. Sometimes payments that do go through our systems originate from outside the country, or even may end up outside our country, so we have to consider that. In the same vein, sometimes when we are faced with challenges, or we're working on a project that we are investigating, there are times that we have actually reached out to our sister organizations in other countries. I know I've reached out to Debbie a lot, but we do reach out to see how they've dealt with certain issues around the topic. And just to get feedback on that issue in order to help us make a decision depending on what it is we're talking about. So we do collaborate in that way. But I also want to mention that in the last several years, we've been modernizing our systems, you know that, and one of the key drivers for that is future interoperability with other systems outside of Canada. If you think about our systems, what they look like and how payments are exchanged in Canada today, for example, the format's are very domestic. So an AFT, for example, cannot be sent out to the States even without someone having to do a lot of work for it to actually be received in an ACH format, or IAT format, I should say, in the States. We've been doing a lot of work, and you'll notice that's why there's a shift lately and globally, to a more global standard that would bring us closer to that interoperability. I'm talking about ISO 20022 which is that global standard, as created by the International Organization of Standardization. It's an open source standard and there's been an uptick in the adoption of ISO 20022 around the world, and I'm sure one of the key reasons for this is because of the promise of interoperability, not just domestically, but internationally. Of course, there's still a lot of work to be done and that needs to be done to make sure that we are interoperable internationally, but the work of the electronic interchange, the exchange of payment files, is bringing the conversation at least one step closer to reality, and that's that adoption of ISO 20022. There are many initiatives too, that are happening around the world today, where payment organizations are coming together to talk about future plans for interoperability. The CPMI work is one of those, as Swift is another organization that's been working in this area for quite some time, so there's a lot of work happening in that interoperable space. How about you, Debbie?

Debbie Bar:
I mean, as I mentioned, the NACHA operating rules are only going to cover the US ACH Networks, we do have the IAT, the international ACH transactions that addresses the rules for that, so that covers ACH entries when the funds enter the US, but it only addresses the US portion of the payment. But as far as the ISO 20022 part, we do know that interoperability is so important. So we do have a mapping guide to help, because the ACH formats are not in that format today, the ISO 20022,so we have a mapping guide to help translate back and forth. And we're also developing some tools that would help with the translation between the US ACH formats and ISO 20022, so that'll be wonderful to have for that interoperability. And bigger picture, you know, NACHA does look to advance the US ACH Networks, and when we do that, we consider what other countries around the world are successfully doing. related to electronic payments. I just saw an article the other day, that was about the British Ministry allowing British banks to hold funds an additional three days if they believe a customer is being scammed as part of authorized push payment fraud, which, you know, we're seeing all over the world. And that's something we're working very hard here in the US on, and so that really dovetails with one of the components of a package of new risk proposals that we just approved. So acknowledging that, that it is a universal problem, the authorized push payments and looking to other payment systems to see what are some of the ways they're trying to reduce fraud, recover funds, how can we kind of mirror those same kinds of tools and opportunities. And I think that's really going to be helpful for all of us.

Liz Dempsey:
Great, thank you for that. Let's look forward now and talk about the future. What do each of you see as the biggest innovation in payments? And how, how will rules account for this innovation? Debbie let's start with you.

Debbie Bar:
So, biggest innovation, you know, that's a tough one, there's so much happening so fast. And of course, I'm going say increasing the speed of payments. Because we're such big proponents of our same day ACH. It started in 2016, and we've offered multiple improvements. We're working on more enhancements, more windows, trying to figure out how to put more hours in a day. But same day ACH is a great opportunity here in the States that we’ll continue to enhance. But I also think one of the big things as far as innovation, we really need to focus on is how do we continue pursuing rules that are going to reduce friction to users, but create friction for fraudsters? You know, we want to have a system that works so well that the rules behind it ensure the payment system does its job, and the users don't have to think about those rules behind it.

Charlie Clarke:
I like that, I really like that, that would be great. On our side, I think the future is really bright. I would be remiss if I didn't mention the Real-Time Rail, which is our real time system that we're building, so implementation of that in the future, just nothing but exciting news for that. The other thing that's on the horizon, or is a promise, the promise of open banking and what that would bring, I think that just so much, maybe not in the rules, and who knows, maybe more rules there, but I definitely see in terms of services and new payment offerings or new payment accessories, if I use that term services offerings, coming out of that the open banking legislation, and also the expansion of our membership, that new payment service providers that are destined to become members of Payments Canada. I think that there's nothing more exciting than to get a new fresh energy into our systems to try to see what new work the ecosystem will bring. So it's very exciting for me.

Liz Dempsey:
Great. Well, Debbie, and Charlie, thank you so much for such an insightful conversation.

Debbie Bar:
Thank you, Liz, that was a great discussion.

Charlie Clarke:
Thank you very much and thanks for inviting me.

Liz Dempsey:
Before we go, be sure to stay connected to all things payments, visit our website payments.ca. And sign up for our newsletter, the Exchange, and be sure to visit the summit.ca for the latest on The SUMMIT, our annual payment conference happening this year in Toronto, from May 29 to 31. I'm Liz Dempsey. Thanks for joining us for this episode of The PayPod.